McConnell Dowell 2019 Annual Review

53 Annual Review 2019 Impairment of financial assets (a) Transition approach The Group has adopted the impairment component of AASB 9 using the modified retrospective method with the cumulative effect of initially applying this Standard recognised at the date of initial application (i.e. 1 July 2018). Accordingly, the information presented in the 30 June 2018 financial statements has not been restated – i.e. it is presented, as previously reported under IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). The effect of adopting the measurement section of AASB 9 on the carrying amount of financial instruments as at 1 July 2018 relates solely to the new impairment requirements, as detailed below Impact of adopting the new standards on the statement of financial position. For assets in the scope of AASB 9 impairment model, impairment losses have increased, however not significantly, and have become more volatile. (b) Year ended 30 June 2019 AASB 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt instruments at Fair Value through Other Comprehensive Earnings, but not to investments in equity instruments. Under AASB 9, credit losses are recognised earlier than IAS 39. Under AASB 9, ECLs are recognised in either of the following stages: • 12 Month ECLs: those are ECLs that result from possible default events within the 12 months after the reporting date; and • Lifetime ECLs: those are ECLs that result from all possible default events over the expected life of the instrument. The Group has elected to measure the loss allowances for trade receivables and contract assets at an amount equal to lifetime ECLs. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs subsequent to initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and an analysis, based on the Group’s historical experience and information, including credit assessment and forward looking information. Measurement of ECLs ECL are a probability-weighted estimate of credit losses. Credit losses are measured at the present value of all cash shortfalls (i.e. the difference between the contractual cash flows due to the entity in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the effective interest rate of the financial asset). Credit-impaired financial assets At each reporting date, the Group has assessed whether financial assets within the scope of AASB 9 impairment requirements are credit-impaired. Financial assets not carried at fair value through profit or loss are assessed at each reporting date to determine whether there is objective evidence of credit-impairment. A financial asset is credit-impaired when one or more event that have a detrimental impact on the estimated future cash flows of the financial assets have occurred. Accordingly, this accounting policy relates to Amounts due from contract customers, Trade and other receivables and: Cash and bank balances. Objective evidence that financial assets are impaired includes, but is not limited to: • default or delinquency by a debtor in interest or principal payments; • restructuring of an amount due to the Group on terms that the Group would not consider otherwise; • indications that a debtor or issuer will enter bankruptcy or other financial reorganisation; • adverse changes in the payment status of borrowers or issuers; • the disappearance of an active market for a security; or • observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets such as changes in arrears or economic conditions that correlate with defaults. Year ended 30 June 2018 In previous years, the Group applied IAS 39 in determining the impairment required for financial assets. The Group assessed, at each reporting date, whether there was objective evidence that a financial asset or a group of financial assets was impaired. An impairment exists if one or more events that had occurred since the initial recognition of the asset (an incurred “loss event”), had an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Financial assets not carried at fair value through profit or loss, including an interest in an equity-accounted investee were assessed at each reporting date to determine whether there was objective evidence of impairment. Accordingly, this accounting policy relates to Amounts due from contract customers, Trade and other receivables and Cash and bank balances. Objective evidence that financial assets were impaired includes: • default or delinquency by a debtor in interest or principal payments; • restructuring of an amount due to the Group on terms that the Group would not consider otherwise; • indications that a debtor or issuer will enter bankruptcy or other financial reorganisation;